By Gary Symons
TLL Editor in Chief
The future of Hipgnosis Songs fund is looking bleak, as 83.2% of shareholders voted to restructure the company.
As well, investors rejected a proposal by the company’s senior management, including CEO Merck Mercuridadis, to prop up its finances by selling off $440 million worth of its music catalog to a sister fund backed by Blackstone.
Investors were unhappy that the song rights would be sold off for much less than the company paid for them, and that Mercuriadis is also involved in the Blackstone fund.
The vote comes after months of shareholder frustration as revenues shrank and the company’s share price plummeted to less than half its value a year ago.
As a result, Mercuriadis is being told to push ahead with “the reconstruction, reorganization, or winding-up of the company,” according to its statement, which includes the possibility of “liquidating all or part of the company’s existing porfolio of investments,” according to a statement from the board cited in Music Week.
The company’s board must put forward proposals to reorganize the fund within six months, which could range from complete reconstruction to shuttering the company and selling the assets.
Included in the Hipgnosis bloodletting, chair Andrew Sutch must resign immediately, while the company’s non-executive directors Paul Burger and Andrew Wilkinson resigned shortly before the vote. The forced resignation doesn’t have much effect on Sutch, however, who had recently announced he planned to retire.
Mercuriadis issued a statement immediately after the vote, saying, “Today’s Hipgnosis Songs Fund AGM marks an opportunity to reset and focus on the future. Our conversations with shareholders have revealed a consensus that they are enthusiastic about the quality of the company’s iconic portfolio of songs, however it is also clear that they are asking for change and we respect that feedback. Hipgnosis Song Management’s new management team and I have already started taking the relevant necessary action to meet the expectations of shareholders.
“Our commitment to the company’s shareholders remains absolute and we look forward to working with a new chair and reconstituted board during this period to ensure that the Hipgnosis Songs Fund delivers for its shareholders. During this process, shareholders can be certain that Hipgnosis Song Management will continue to manage the songs with the greatest duty of care as always.”
The worry for others working in the music catalog industry is whether the same factors that impacted Hipgnosis could cause other, similar companies to struggle.
The impact of the move on the music catalog sector remains uncertain, but it is certainly true that profit margins have declined as interest rates have risen, and asking prices for catalogs reached record high levels. In recent months, several deals involving major catalog assets from Queen, Pink Floyd and Michael Jackson have dragged on, and it’s uncertain whether they will go through.
So, what’s behind the crisis at Hipgnosis, and what does it mean for the music licensing industry?
Analysts and TLL research show there are three primary reasons for the problems at Hipgnosis. The most obvious and dramatic stems from the U.S. Copyright Royalty Board’s decision last year to recalculate its royalty payments downward. As a result, the U.K. music rights valuation company Citrin Cooperman dropped its estimate of the amount Hipgnosis Songs Fund can expect to receive in royalties from tracks played between 2018 and 2022 from $21.7 million to $9.9 million.
Hipgnosis Songs Fund’s shares dropped more than 10% in early trading after the news became public.
“The board now expects to receive significantly lower retroactive payments,” Hipgnosis said at the time. “The board has decided to withdraw the proposed interim dividend.” The company said it could not pay an interim dividend without breaching covenants connected with its lenders. Hipgnosis has a revolving credit facility in place with its bankers, which include a range of covenants that would prevent the company from paying dividends if it is not able to pay its debt payments in full and on time.
A second reason is that the huge values ascribed to music catalogs over the past five to six years created an investment bubble which may have created valuations that can’t be supported by royalty payments, at the same time that interest rates have soared.
Hipgnosis earns money every time one of the songs it owns the rights to is played, but if those royalties don’t support the capital outlay for a particular catalog, then the company’s debt load would prevent it from earning enough profit to pay dividends.
Thirdly, the share price for the UK-listed public company has dropped by half in a single year, from a high of 130 British Pounds, to just 65 Pounds. That dramatic reduction in share price can make it harder to raise more funds, and combined with its debt load, harder to obtain new loans as well.
Hipgnosis was founded in 2018 by the Canadian-born Mercuriadis, who moved to the UK and became a prominent manager of top stars like Elton John, Guns ‘n’ Roses, Beyonce, and Iron Maiden, among others. The company was a major instigator in the dramatic rise of music catalogs that began roughly in 2016, as it spent billions of pounds buying catalogs that it saw as undervalued assets in the era of streaming and synch licensing, which monetizes the use of songs in videos on platforms like TikTok or Instagram Reels.
Mercuriadis boasted that investing in music royalties would be as valuable as oil or gold, because royalties were seen as reliable and recurring revenue streams.
Russ Mould, an investment director at AJ Bell, told The Guardian newspaper this week that the dream of never-ending cash flow has gone sideways at Hipgnosis.
“The investment company was set up to invest in music royalties, implying their regular cashflows would generate a growing stream of income for investors,” he said. “Sadly, its 15 minutes of fame has gone up in smoke amid accusations of poor corporate governance, a disastrous attempt to sell some assets at a big discount to a private fund which its adviser also manages, and now a dividend crisis.”
Part of the controversy at Hipgnosis is related to the plan to sell roughly 20% of its catalog portfolio for $440 million to a Blackstone fund, which is also run by Mercuriadis. As the sale would take place at a considerable discount, many investors were critical of the proposed sale.
For a Deeper Dive Into The Music Catalog Industry, See Story Below
For others working in the music licensing industry, and particularly those involved in buying music catalogs, the fallout from the Hipgnosis crisis along with the recent ruling on royalty values could also impact on overall valuations for other catalogs. Looking at the history of the business since 2015, however, it wouldn’t be that surprising to see some pullback in valuations, as the sale price of catalogs has skyrocketed to levels unmatched in history.
Until 2016 investment in music catalogs never cracked the half-billion-dollar mark, but in 2016 the sales of these musical treasure chests began to take off.
In that year sales of music catalogs reached roughly $900 million compared to only $200 million in 2015. The number surpassed $1.2 billion in 2017, reached $2.5 billion in 2018, and soared to $5.29 billion in 2020, or 26 times more than music catalogs earned in 2015.
Investment in catalogs in 2022 has remained roughly static at $5.3 billion for reported deals (according to Midia Research), but the value of catalogs continue to rise.
Bokksu Unveils Advent Calendar Brimming With Licensed Japanese Treats
In May this year CNN reported that the music catalog from the British rock band Queen could sell for more than $1 billion this month.
The source added that the sale could surpass $1 billion and that the deal is “expected to close within one month,” which would indicate a completion date for the deal before the end of June.
However, the Disney Music Group has raised doubts about the story, telling CNN that it has no plans to sell the catalog.
Nevertheless, the fact someone is willing to pay that sum for a catalog shows the historic rise in valuations over less than a decade. For example, in 2022 Bruce Springsteen set the current record with a $550 million sale. Sting logged in at a reported $300 million, Justin Bieber sold his for $200 million, and Katy Perry for a reported $225 million just last month.
Those working in the music licensing industry will be watching to see if the problems at Hipgnosis are simply due to internal management issues, or if the company’s fall from grace is an indication that valuations and royalties may decline in 2024 and beyond.
‘Arthur’ Creator Marc Brown Hops Into New Kids Series With CBC